Report on Q2 2014

Report on Q2 2014

3 Jul 2014

I have noted before that it is generally the case that smaller companies’ share prices are relative beneficiaries of improving confidence. Large blue chips do better when investors are seeking protection. In Q2, the FTSE 100 rose by 2.2% but the FTSE 250 (companies 101-350) fell by 3.4%. There has been widespread profit taking from the shares where much of last year’s good stock market performance was concentrated. This is evidence that nervousness is about.

As was evident in Q1, the prices of assets regarded as safe continue to rise and the definition of “safe” to become less demanding. I mentioned the marked fall in European government bond yields in my Q1 report and returned to the theme in June. Irish 10 year bond yields fell from 3.43% to 2.83% in Q1 and have since declined to 2.37%; Portuguese from 5.9% to 3.73% and now to 3.66; French from 2.46% to 1.99% to 1.61%; and so, it seems, it goes on.

Nervousness among equity investors is generally a good thing. Complacency is dangerous but very hard to spot. (An interesting philosophical question is: can one simultaneously be complacent and recognise one’s complacency?) It is only when nervousness turns to panic and rout that it becomes destructive. There is a stock market saying to the effect that a bull market climbs the wall of worry. I find this quite wise.

There is another well-known traditional piece of advice – “Sell in May and go away” with its less famous follow up – “Come back on St Leger’s day”. The St Leger is a horse race which falls this year on 13 September. I have always felt that this is suspiciously convenient for City types who want to go to Wimbledon, Lords, Henley and the south of France. Certainly share volumes fall in the summer and market moves can be exaggerated. It’s a nasty thought that your portfolio might misbehave if you are not there to look after it. So, by all means, make up a little rhyme to justify some profit taking.

I have certainly questioned the level of my shares that have done well and have taken profits in some. But I have failed to frighten myself into believing that a serious correction is on the way. Investors have a collective memory that is inclined to overestimate the probability of shocks (good or bad but usually bad) recurring. The FTSE has fallen by nearly 50% on two occasions this century – from 2000 to 2003 and from 2007 to 2009. If you believe that the stock market will correct by 50% every seven years then you have every reason to be worried in 2014. But such corrections are very unusual. The shocking stock market crash of October 1987 was frighteningly sudden but from top to bottom it was a fall of 30%.   

The protectionists triumphed against Pfizer’s attempt to buy AstraZeneca. The only good news from me was that I took my own advice and reduced my shareholding at £46.70. Today it is £43.70 which probably includes a small premium for the hope that Pfizer will reappear.

Morrisons continues to trade like a dog with a supposed dividend yield of 7.6%. In general, the weakness of supermarket shares has continued, as has the criticism of their businesses.  Tesco and Sainsbury both yield more that 5%, assuming that they will maintain their dividends.  I remain a stubborn Morrisons shareholder, wondering if I dare buy more.

Go-Ahead Group soared on the news that it was awarded a huge rail franchise, connecting important airports and stations in south-east England. The shares rose by 27% in the quarter. This was very lucky for me (I had no idea that this was in the pipeline) but it is true that good things happen to good companies. Major contracts are rarely awarded to companies with strained balance sheets – First Group issued a statement expressing its disappointment that it was not awarded that contract. In my view it needs to look for an explanation at its balance sheet which, even after last year’s rights issue, is still heavily loaded with debt.

Most banks continue to be pursued by regulatory fines as the legacy of the financial crisis drags on. Ordinary profits for ordinary shareholders could be years away. I own no banks and am very happy with this closely guarded position.  

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